Why Brazil power distributors and consumers are concerned about the free market expansion

Brazilian electricity distributors and consumers are concerned about the expansion of the local free power market, where purchase and sale transactions take place subject to freely negotiated bilateral contracts. 

Some of the sensitive points involve the so-called legacy contracts, that is, those closed by power distributors with generators to assure supply in the regulated market. With more consumers migrating to the free contracting environment, utilities face growing over-contracting risks.  

Another moot point is the separation of what is called ballast and energy. The former corresponds to the physical guarantee of a power plant or the maximum that the plant can sell, and is therefore a reliability product. The latter, in this context, refers to the load actually consumed. 

Despite being distinct products, ballast and energy are sold in Brazil in a single contract, which provokes debate about energy prices.

Other challenging questions include the small number of smart meters in the country, risks of market concentration and the increase in power rates for consumers that remain in the regulated environment.  

In a technical note published at the end of January, watchdog Aneel addressed such topics, proposing a series of regulatory improvements to enable the opening of the free power market in a harmonious manner. 

BNamericas spoke with Ricardo Brandão (left in photo), regulatory director at power distributors’ association Abradee, and Clauber Leite, energy program consultant at consumer defense institute Idec, about the issues.

BNamericas: What is your opinion about the recommendations for regulatory improvements recently presented by Aneel? Did they consider the proposals made by Abradee?

Brandão: In general, the Aneel study was a consolidation of the contributions presented by all the agents. There is a concern not to make proposals on topics that are public policy, which is the competence of the [mines and energy ministry] MME. Therefore, it does not advance in an assertive way saying that the policy should follow one path or another, limiting itself to pointing out issues pondered by the agents, leaving room for MME to exercise policies. 

A sensitive point is the legacy contracts, which are, today, with the distributors, whether those resulting from Aneel's regulated auctions or referring to the physical guarantee quotas of MP 579 [a provisional measure published during Dilma Rousseff’s government to reduce power rates]. In its report, Aneel recalls that this is a matter of policy or legal recommendation. 

BNamericas: What other points highlighted by the agency do you consider important?

Brandão: Among them are the treatment of the consumer served by the retail trader and the model of ‘supplier of last resort’, which needs to be better detailed. 

The improvements recommended by Aneel adhere to what Abradee defended, such as the treatment of legacy contracts, separation of ballast and energy and binomial rates, besides the indication that the opening needs to be gradual. Much of this is being discussed in the scope of federal bill 414/2021, which improves the regulatory and commercial model of the electricity sector with a view to expanding the free market. 

Aneel’s work has the merit of having heard the various segments of society, with contributions that add to the debate, with a rich work of analysis. 

Editor's note: According to the local association of energy traders Abraceel, the retail trader is the agent responsible for representing consumers and energy generators before the electric power commercialization chamber CCEE. 

According to 2W Energia, the supplier of last resort is the regulatory figure used to provisionally guarantee the continuity of energy supply without generating an impact on the other agents in the market. If the company with which the consumer had contracts is prevented from exercising its activity, due to shutdown or other reasons, the supplier of last resource takes over the contract for a maximum period determined by the regulation (a period of three months is being studied).

The Megawhat consulting platform explains that the binomial tariff is the energy rate that considers two types of costs: the fixed cost, shared by the group of users of the network, and the variable cost, proportional to the consumption of the consumer. In Brazil, the binomial tariff is already applied for high voltage consumers, that is those connected at voltages above 2.3kV.

BNamericas: What is your opinion about the recommendations for regulatory improvement presented by Aneel? Was the agency concerned about protecting the rights of the consumers?

Leite: There was some concern on the part of the agency to somehow protect the consumers that migrated to the free market, but little concern for the consumers that didn't migrate. Will there be a rate increase? Will the costs be equally divided among all consumers, or will those who migrate leave some costs behind? 

BNamericas: Do you think it’s feasible for the free market opening under study to be started in 2024?

Leite: The problem with a regulatory opening without a structural reform of the electricity sector, such as via the 414/2021 bill, is that it becomes an incomplete reform and ends up disregarding several impacts of the change. The separation of distribution, commercialization and metering activities, the binomial tariff and smart meters are examples of aspects that still need to be improved before this opening.

BNamericas: Wouldn't the fact that we still have a large majority of electromechanical meters be an impediment to this? Or has this scenario already been or can it be reversed by then?

Leite: Certainly, this is a barrier that needs to be cleared, who will bear the cost of this measurement, what is the impact on the tariff, if it will be paid by those who migrate or if it will be shared among all consumers. So you also have to consider unbundling the metering service.

BNamericas: How can you curb abuses of market power and access to consumer information in the case of economic groups that own distributors and trading agents in the free market?

Leite: The de-verticalization of the energy sector should be carried out here as well. It doesn't make sense to open up the market and keep it concentrated. Indicators must be established to evaluate the policy to verify if in fact it’s being effective or if it’s necessary to go back to the previous model. 

Sometimes a premise is taken as an absolute truth and the subject is never discussed again. The work of communicating with the consumer should be much broader than what’s been done in the sector, because it’s a complex reality that can favor or harm some groups.

The opening is a possibility for the consumer to choose his source, but he’ll still have some kind of relationship with the distributor. Who will the consumer complain to when there’s a power outage? Who will guarantee the expansion and new connections, and maintenance of the distribution system? These are simple things, but they need to be communicated very well.